Poland's predictable politics puts economy at risk

By bne IntelliNewsSeptember 14, 2011

Wojciech Kosc in Warsaw -

The ruling centre-right party Civic Platform (PO) looks certain to become the first party in Poland's post-communist history to win consecutive elections on October 9. While the government appears to be getting the credit for Poland's relatively strong economic performance through the crisis, analysts worry the weakness of the opposition risks complacency setting in.

"I know that things aren't going as fast as you'd like, but we're headed in the right direction," Donald Tusk cajoles Poles in PO's latest TV ads. The prime minister is referring to the achievements of his government, such as expanding the country's transport infrastructure programme to an unprecedented scope. "There are currently more motorways under construction than any time before in Poland," the government keeps saying - an achievement which inspired the ruling party to launch its electioneering with the slogan: "Poland under construction".

However, constructing a more sustainable economy will demand immediate attention following the elections, says Marcin Mrowiec from Bank Pekao, who worries that the electioneering has Civic Platform believing its own hype. "The government plans to reduce the budget deficit to 2.9% in 2012, but that could prove difficult with economic growth forecast at no more than 3.1% this year - well below the government's forecast of 4.0%," says Mrowiec. "It's time for the government to get real about the deficit and come to terms with the fact that it's likely to be closer to 3.6%."

Mrowiec says that the "loans of trust" that financial markets have granted Poland via €35.5bn of sovereign debt issues this year won't last, unless the government deals with the imbalance of the state budget. "If the deficit isn't reduced and the public debt isn't capped at a maximum 55% of GDP, negative reaction could build," he says.

Investors look increasingly worried. Although yields on sovereign bonds have steadily shrunk throughout the year - from 630 basis points or so in January to around 550 bps in early September - a brutal sell-off in the zloty during September has made the Polish currency among the worst performing currencies and caused yields to start rising again. On September 9, the zloty hit 4.3483 against the euro, the weakest intraday level since July 2009. Mrowiec also points at credit default swap (CDS) rates as evidence for concern. "I think investors might be getting just a little bit more cautious these days; the appetite for sovereign debt has slowed, while CDS rates are increasing," he says.

He's backed up by Deputy Finance Minister Dominik RadziwiÅÅ, who told Bloomberg in early September that "the level of [Polish] CDS is probably quite absurd right now." The insurance on Polish sovereign debt widened last month to 236 bps, the highest level since April 2009.

Little choice

Despite the mounting evidence for concern, analysts complain these issues are hardly present in either the election campaign or the media. This strategy appears to be working for the government; in early September, polls showed that Civic Platform is in line to head the next government with 33-36% of the vote.

Support for Civic Platform remains strong within business circles, says Jeremi Mordasewicz, an expert on economic policy at employers' organisation Lewiatan. "We believe that the government will pursue a policy of less welfare and more jobs," he says, "although whether coalition partners of the new government will allow that, is a different matter."

The opposition Law and Justice (PiS) party, offering a mix of right-wing nationalistic rhetoric and a protectionist economic programme, is a dead cert to finish as runner-up, with polls suggesting it will garner around 20% of the vote. First choice to help Civic Platform form a government will be current coalition partner the Polish Peasants (PSL) party, which polls predict should pull in up to 5%. However, Civic Platform might also need to include the Democratic Left Alliance (SLD) should it gain the 8% or so of votes predicted.

That the "Polish opposition is simply weak and unconvincing" is one of the problems holding back real debate over economic issues, reckons Bartlomiej Biskup from Warsaw University, an expert in political marketing and election campaigns.

Tusk declared just before the global crisis hit a couple years ago that "Poland is a green island of growth." His words were mercilessly ridiculed by the opposition of course, but have stirred little serious discussion. But it's not as if there aren't enough issues to talk about. Apart from the budget deficit, the level of public debt and weakening dynamics of economic growth, analysts are asking questions about industrial production as weakening global growth stalks an economy that thrives on exports. Industrial production growth managed no more than 1.8% in July compared with the same month in 2010 versus expectations of 3.5%. It also shed 6% compared with June.

The lack of public debate is even more surprising given that the weakening zloty is hitting Polish homeowners hard on their mortgages. Like many currencies, the zloty has weakened considerably against the Swiss franc, and this is directly affecting the 700,000 homeowners who took out mortgages denominated in Swiss francs when the zloty appeard to be inexorably rising against developed market currencies before the crisis. These people are facing higher mortgage payments, even as they watch the market value of their property drop.

On top of all this, the government is also facing the question of how to continue financing investment in the face of falling EU funding from next year, with the level of funds from Brussels yet to be decided in the EU next budget. "How is the government going to finance investment without having to rely on EU funds so much and in the context of the health of public finances, is a key question," says Mrowiec.

In theory, all of this provides plenty of ammunition for populists like PiS chairman JarosÅaw Kaczynski, or SLD leader Grzegorz Napieralski to attack the government on inflation or rising taxes and mortgage payments. But as Biskup points out, people see little choice apart from Civic Platform. "The government hasn't worn out its popularity yet because people just don't believe that parties like PiS or SLD can do anything better."

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